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Bush panel wants to kill the 401(k)

You can beat them with a stick, but tax cuts for the rich just won't go away.

The president's advisory panel on tax reform issued its report in November and championed a provision that would effectively trash what was arguably the greatest success of the Reagan administration.

The accident of legislative history I'm referring to is the invention of the 401(k) plan. In a desperate effort to salvage his tax cuts for the rich, President Bush's hand-picked committee has figured out that if the tax deduction for 401(k) plans effectively went away, there would be a lot more tax revenue generated by mainstream taxpayers.

The operating word here is "effectively." Let me explain by starting with the basics:

In spite of what we have recently been reading about the demise of pension plans, they never really served the average American to any great extent. Historically, conventional retirement plans required that people work for the same company long enough to become "fully vested."

Since the average American changes jobs once every five years, a relatively small portion of the workforce benefited enough to realize what on paper seemed an adequate retirement income.

Reagan's basic idea of the 401(k) was that it would offer a "portable" retirement account that could move from job to job with the employee. This aspect has worked, and the average American is on schedule to have five times more money at retirement than he would have received as one of the typical wandering minstrels of the American work force.

By extension, the government collects five times less in taxes than it otherwise would have received.

Next, we have the nuisance factor of 401(k) testing which limits what highly compensated employees (those who made more than $90,000) can deposit. While this year's dollar maximum is $15,000 (plus $5,000 more for people over age 49), senior executives can't deposit these dollar maximums unless the average percentage contribution from the rest of the employees is high enough to meet certain tests.

These tests drive everyone nuts, but guess what: They prompt company executives to go to great lengths to encourage participation from all employees.

Matching contributions, employee meetings, investment education and automatic payroll withholding are all part of the process. The end result is that participants contribute far beyond anything they would have otherwise deposited into Individual Retirement Accounts (IRAs) on their own.

Many studies -- not to mention common sense -- will confirm this fact.

The Bush Tax Reform Commission has come out with a great idea: Just let people deposit into a variety of tax-sheltered accounts that have nothing to do with the job. This eliminates the need for employers to set up and aggressively sponsor the kind of plan that has worked so effectively for over 20 years.

We also know what else will happen: People won't contribute to the extent that they are encouraged to do today. The "401(k) mentality" will drift away, and with less money deducted from taxable incomes, the government will collect more in tax revenue -- primarily from middle-income American employees.

This will help to support the tax cuts for the rich while making it look like the administration is actually increasing the opportunity to save more pre-tax dollars.

The panel obviously looked at the same studies that showed how ineffective individuals were at saving for retirement without the support of their employers. In the face of a growing concern over retirement savings shortfalls, this approach will only make it worse.

It's throwing the baby out with the bath water, but not before shrinking the government and drowning it.

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As an independent employee retirement and benefits firm with deep plan expertise and experience, Pension Dynamics is uniquely qualified to design and administer your employee retirement and benefit plan.